ET in the Classroom: Gilt Funds
gilt funds.
WHAT ARE GILT MUTUAL FUNDS? Gilt funds or government securities funds as they are called are a category of debt schemes that invest only in bonds issued by the central and state governments. Their portfolios comprise a mix of government securities maturing at different times.
HOW DO GILT FUNDS WORK?
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View Details» <div data-placement=«Mid Article Thumbnails» data-target_type=«mix» data-mode=«thumbnails-mid» style=«min-height:400px; margin-bottom:12px;» class=«wdt-taboola» id=«taboola-mid-article-thumbnails-107865360»>Whenever the central or state government needs funds, it is arranged by the Reserve Bank of India (RBI) on behalf of the government. The central bank raises this money from investors such as banks and insurance companies through auctions where it issues government securities or Gsecs having a fixed tenure. Gilt funds too can participate in such auctions. These funds also buy and sell Gsecs in the secondary markets based on their requirements and outlook.
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DO GILT FUNDS HAVE ANY RISKS? Since the securities held in the portfolio of the gilt fund are issued by the government, there is no credit risk as the government never defaults on its payments. However, these funds carry an interest rate risk. In a rising interest rate environment, if the interest rates rise sharply, the prices of long-tenure government securities will fall, leading to a mark-to-market loss for the investor.
WHO SHOULD INVEST IN GILT FUNDS? Aggressive fixed-income investors who believe interest rates have peaked now and could fall in the next 9-12 months, can start accumulating
